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Economics 3,4 > Unit 3 AOS3 > Flashcards

Unit 3 AOS3 Flashcards

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1
Q

What are exports

A

= transactions b/n eco agents in Aus + rest of the world in process of purchasing g/s produced in Aus

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2
Q

What are imports

A

= transactions b/n eco agents in Aus + rest of the world in process of purchasing g/s produced by another nation overseas

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3
Q

How does international trade cause low prices

A
  • p’ers have access 2 cheaper suppliers
  • inc competition 4 local producers
  • dec domestic market power
  • inc wage competition
  • economies of large scale production
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4
Q

What is the link b/n low prices and living standards

A

-> Low prices means that real purchasing power of average income = inc = inc access 2 g/s = inc L.S

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5
Q

Why do countries engage in trade

A

1) Lower prices
2) Greater choice
3) Economies of scale
4) Access 2 more resources
5) Inc competition + efficiency

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6
Q

What is the link between greater choice and living standards

A

-> inc access 2 wider range of g/s inc MLS + utility improves -> inc quality of life inc NMLS

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7
Q

What is economies of scale

A

= volume that a firm needs 2 produce so that it is able 2 effectively cover its fixed costs + operate in a market @ a competitive level

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8
Q

What is the link between economies of scale and living standards

A

= p’er able 2 offer dec price products t/f inc access -> inc MLS t/f dec financial stress = inc NMLS

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9
Q

Provide a summary of access to more resources from international trade

A

From international trade, Aus bus’ have access 2…
-> physical capital i.e machinery
-> foreign human capital which removes capacity constraints
-> foreign financial capital in form of debt/equity -> bus expansion

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10
Q

What is the link between access to more resources and living standards

A

MLS
-> Bus inc access t/f inc willing 2 produce = inc jobs + dec prices = inc income + inc p power
-> gov.t have access 2 g/s 2 inc infrastructure = dec prod costs t/f dec bottlenecks + dec prices + inc access
NMLS
-> inc jobs = dec financial stress + dec crime rates
-> inc quality of life from better public transport that inc air quality
-> improved access 2 health + education = inc mental + physical health + literacy rates

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11
Q

How does trade increase competition and efficiency

A
  • international specialisation = use of resources in most efficient way
    -> inc output + export excessive production
    -> use income 2 spend on imports t/f inc output + keep costs down
  • competition inc efficiency b/c -> better + more efficient production / move 2 industry where comp advantage can be maintained
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12
Q

What is the structure of the balance of payments

A

Balance of payments ->
1) Current account
-> balance on merchandise trade
-> net services
-> net primary income
-> net secondary income
2) Capital and Financial account
-> Capital account
-> Financial account
- net portfolio investment
- net direct investment
- financial derivatives
- net other investment
- net reserve assets

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13
Q

What is credit

A

= whenever money is received
They’re shown as +ve accounts

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14
Q

What is debit

A

= whenever money is paid
They’re shown as -ve accounts

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15
Q

What is the balance of payments

A

= record of financial transactions b/n economic agents of Aus + eco agents overseas

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16
Q

What is the current account

A

= records all receipts + payments of a current nature. Consider transactions that do x create future obligations

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17
Q

What is the balance of merchandise trade (BoMT)

A

= value of export credits 4 goods sold overseas less value of import debits 4 goods purchased from abroad

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18
Q

What is Net services

A

= value of service credits received from overseas less value of service debits paid abroad

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19
Q

What is net primary incomes

A

= difference b/n values of income credits received from overseas less the value of debits paid abroad

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20
Q

What is net secondary incomes

A

= difference b/n value of secondary income credits received by our residents less the value of secondary income debits paid abroad

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21
Q

What is a current account deficit

A

CAD = total payment in CA of balance of payments exceeds total receipts

obviously CAS = opposite

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22
Q

What is the capital account

A

= capital transactions include net capital transfers + net acquisition of non produced, non financial assets
Capital transfers involve net inflows of funds into Aus by migrants
Net acquisition covers excess of credits over debits 4 sale of copyright, patents, overseas franchises, trademarks

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23
Q

What is the financial account

A

= show how Aus funds / pays for its CAD
-> record balance of value of total credits 4 investment + borrowing received by Aus from abroad less total debits 4 investment + leading by Australians abroad

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24
Q

What are the factors of the financial account

A

1) net direct investment
2) net portfolio
3) financial derivatives
4) other investment
5) net reserve assets

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25
Q

What is net direct investment

A

= purchase, setting up or expansion of companies + assets in Aus by foreigners classified as credits less similar investment overseas by Aus, classified as debits

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26
Q

What is net portfolio investment

A

= difference in value of transactions by foreign individuals purchasing Aus shares, debts + securities, less value of similar assets purchased by our residents

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27
Q

What is financial derivatives

A

= complex financial investments that create assets or liabilities

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28
Q

What is other investment

A

= credits (Bank 2 Bank) less debits (Bank 2 Bank) 4 loans + deposits

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29
Q

What is net reserve assets

A

= contains both RBA + gov.t transactions involving dealings in reserves of foreign currencies, gold, special drawings rights + required contributions 2 IMF
Money received from overseas = credits, money paid = debits
-> gov.t 2 gov.t

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30
Q

What is the structural component of CA

A

-> relates 2 AS side of economy
1) Savings / investment imbalance
-> NFL = NFD + NFE
2) Low levels of international competitiveness due 2 dec lvls of efficiency + inc costs of production

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31
Q

What is the cyclical component of CA

A

-> movements in the CA related 2 changes in economic cycle / lvls of economic activity in Aus economy

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32
Q

What does strong economic activity in the cyclical component of CA cause

A
  • Inc AD = inc gap b/n savings + investment
    -> net primary income = inc debits as we borrow more overseas
    -> trade imbalance moves further into deficit (inc debits in BoGS)
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33
Q

What does weak economic activity in the cyclical component of CA cause

A
  • Dec AD = dec gap b/n savings + investment
    -> net primary income = dec as we borrow less from overseas
    -> trade imbalance moves closer to surplus (dec in debits in BoGS)
    -> likely due 2 swings in the BoGS which is largely due 2 swings in bus cycle
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34
Q

Non negotiables when talking about the CA

A
  • Must reference inc / dec in value of debits / credits in subaccount
  • Subaccount that is likely 2 be impacted
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35
Q

AD factors that impact the current account

A

1) Increase disposable income
2) Recent inc in interest rates
3) inc in labour costs
4) fall in c’er + bus confidence
5) Depreciation of the AUD
6) Impact of drought
7) Recent slowdown of overseas growth
8) Improvement in labour productivity

36
Q

How does increased disposable income impact the current account

A

= cyclical
-> BoMT + Net Services impacted
Debits b/c inc M expenditure
Inc debits
Impact CA by inc debits which dec surplus

37
Q

How does recent increases in interest rates impact the current account

A

= Cyclical
-> BoMT + net services impacted
Debits dec -> inc CAS

38
Q

How does increase in labour costs impact the current account

A

= Structural
-> BoMT + Net Services impacts international competitiveness
Credits dec + Debits inc
-> dec CAS

39
Q

How does fall in consumer confidence and business confidence impact the current account

A

= Cyclical
-> BoMT + Net Services impacted
Debits dec
-> inc CAS

40
Q

How does drought impact the current account

A

= Structural
-> BoMT + Net Services impacted
Credits dec (maybe debits too but lower rate)
-> dec CAS

41
Q

How does the recent slowdown of overseas growth impact the current account

A

= Cyclical
-> BoMT +Net Services impacted
Credits dec
-> dec CAS

42
Q

How does improvement in labour productivity impact the current account

A

= Structural
-> BoMT + Net Services impacted
Credits inc
-> Inc CAS

43
Q

What is net international investment position

A

= describes extent 2 which Aus = financially obligated 2 rest of the world
-> NIIP made up of Aus’ net foreign liabilities (NFL) which is composed of Net foreign debt (NFD) and Net foreign equity (NFE)

44
Q

What is net foreign debt

A

= calculated by looking @ the net debt obligations that flow from our total borrowing from overseas and subtracting our ‘total lending’ 2 overseas

45
Q

What is the composition of net foreign debt

A
  • Public / government debt (approx. 20%)
  • Private debt (approx. 80%)
46
Q

What is net foreign equity

A

= net equity obligation that results from foreign ownership of Aus assets less Aus ownership of foreign assets

47
Q

What is terms of trade

A

= ratio of average prices received 4 Aus X relative 2 average prices paid for M

48
Q

What is terms of trade formula

A

= Export price index / import price index x 100

49
Q

What is the export price index

A

= constructed by measuring changes in the average prices of a basket of Aus X goods with items weighted 2 their relative importance in trade

50
Q

What is the import price index

A

= constructed by measuring changes in average price of a basket of Aus M goods with items weighted according 2 relative importance in trade

51
Q

What are changes in terms of trade referred to as

A

= unfav / fav

52
Q

How can changes in global demand for Aus exports impact terms of trade

A

-> dec demand = dec price = dec TOT
-> inc demand = inc price = inc TOT

53
Q

How can commodity prices impact terms of trade

A

(top 3 = iron ore, coal, gas)

inc prices -> inc TOT
dec prices -> dec TOT

54
Q

How do production costs in trading partners impact terms of trade

A

-> dec costs -> cheaper M t/f inc pressure on TOT
-> inc costs -> more expensive M t/f dec pressure on TOT

55
Q

How does a movement in TOT impact CAS

A

-> inc TOT -> inc CAS b/c value of credits 4 X inc / value of debits 4 M dec (BoMT+ NS)

opposite for dec TOT

56
Q

How does a movement in TOT impact AD

A

-> inc TOT -> inc price 4 X -> inc (X-M) -> inc spending on g/s produced in Aus economy over given period of time

opposite for dec TOT

57
Q

How does a movement in TOT impact national income

A

inc TOT -> inc price 4 X -> inc national income in form of disposable income + company profits

opposite for dec TOT

58
Q

How does a movement in TOT impact strong and sustainable growth

A

inc TOT -> inc real GDP from inc national income reinvested in domestic economy = inc private expenditure (C+I) = inc AD = inc economic activity = inc GDP h/r causes demand inflationary pressures

opposite for dec TOT

59
Q

How does a movement in TOT impact full employment

A

inc TOT -> inc DD4L in economies = inc jobs + dec unemployment from inc AD through inc national income

opposite for dec TOT

60
Q

How does a movement in TOT impact price stability (inflation)

A

inc TOT -> inc national income -> inc AD from inc C+I -> inc eco activity from producers expanding production t/f expansion in AS closer 2 productive capacity t/f creating demand inflationary pressures

opposite for dec TOT

61
Q

How does a movement in TOT impact living standards

A

inc TOT -> inc national income = inc C+I t/f inc eco activity -> inc dd4l = dec unemployment -> inc L.S b/c c’er have inc disposable income t/f access g/s + financial stress dec, +vely impacting physical + mental health

opposite for dec TOT

62
Q

What is the foreign exchange market

A

= market 4 trading currencies t/f determines foreign exchange rates 4 every currency
-> includes all aspects of buying + selling + exchanging currencies @ current / determined prices

63
Q

Factors affecting exchange rates

A

Relative interest rates
Capital flows
Demand for X + M
The terms of trade inc
The terms of trade dec
Relative rates of inflation

64
Q

How do relative interest rates affect exchange rates

A

Aus > ROW -> inc demand 4 AUD 2 invest in Aus (App)
Aus < ROW -> inc supply of AUD 2 invest overseas (Dep)

65
Q

How do capital flows affect interest rates

A

Capital inflow = movement of $ into Aus = inc demand 4 AUD -> appreciation of AUD
Capital outflow = movement of $out of Aus = inc supply 4 AUD -> depreciation of AUD

66
Q

How does demand for exports and imports impact exchange rates

A

overseas economic growth inc -> inc demand 4 AUD -> appreciation of AUD
growth in national spending -> supply of AUD in F.C market -> depreciation of AUD

67
Q

How does an increase in the terms of trade impact exchange rates

A
  • inc prices received 4 X relative 2 M
  • resulting from inc commodity prices
  • inc purchasing of commodities -> inc need 4 AUD = inc demand -> appreciation of AUD
68
Q

How does a decrease in the terms of trade impact exchange rates

A
  • dec prices received 4 X relative 2 M
  • resulting from dec commodity prices
  • dec purchasing of commodities -> dec need 4 AUD = dec demand -> depreciation of AUD
69
Q

How do relative rates of inflation impact exchange rates

A

Aus inflation rate > ROW -> depreciation b/c dec in X demand -> dec demand 4 AUD + inc import demand -> inc supply of AUD

opposite for Aus inflation rate < ROW

70
Q

How does the an exchange rate movement impact CAD

A

-> dec international competitiveness b/c X more expensive in FC terms + M cheaper in AUD terms = dec value in credits + inc value in debits in BoMT + NS -> deterioration in CAD

71
Q

How does the an exchange rate movement impact strong and sustainable growth

A

= dec international competitiveness = X more expensive in FC terms + M cheaper in AUD terms = dec (X-M) t/f dec AD = dec volume of production b/c p’er dec output = dec levels of economic activity
H/r dec demand inflationary pressures

72
Q

How does the an exchange rate movement impact full employment

A

-> dec international competitiveness = X more expensive in FC terms + M = cheaper in AUD terms = dec (X-M) t/f dec AD -> dec volume of production t/f dec DD4L = inc cyclical unemployment

73
Q

How does the an exchange rate movement impact low inflation

A

-> dec international competitiveness = X more expensive in FC terms + M cheaper in AUD terms = dec (X-M) = dec AD = dec volume of production t/f move away from productive capacity -> less demand inflationary pressures

74
Q

How does the an exchange rate movement impact living standards

A

-> dec international competitiveness = X more expensive in FC terms + M = cheaper in AUD terms = dec(X-M) = dec AD = dec volume of production as p’ers dec output = dec DD4L = inc cyclical unemployment
-> dec MLS + NMLS

75
Q

What is international competitiveness

A

= measures a country’s ability 2 compete in global markets 4 g/s

76
Q

Factors that influence international competitiveness

A

1) productivity
2) production costs
3) availability of natural resources
4) exchange rates
5) relative rates of inflation

77
Q

How does productivity impact international comeptitiveness

A

= measured by output per unit of input
-> inc productivity = inc international competitiveness b/c Aus p’er able 2 offer g/s @ lower prices

78
Q

How do production costs impact international competitiveness

A

-> inc = dec Aus competitiveness b/c p’er less willing / able 2 produce g/s @ low prices

opposite for dec

79
Q

How does availability of resources impact international competitiveness

A

-> inc access = inc competitiveness -> theory that country should produce g/s where it is inc efficient @ producing relative 2 another country

80
Q

How do exchange rates impact international competitiveness

A

-> depreciating AUD = inc
-> appreciating AUD = dec

81
Q

How do relative rates of inflation impact international competitiveness

A

-> low compared 2 ROW = inc international competitiveness b/c g/s inc attractive 2 domestic + international c’er

82
Q

How does international competitiveness impact strong and sustainable growth

A

-> inc levels of international competitiveness = X cheaper in foreign currency terms -> inc X, dec M = inc AD -> inc production 2 meet demand -> inc eco activity + growth (real GDP) h/r demand inflationary pressures

83
Q

How does international competitiveness impact full employment

A

-> inc levels of international competitiveness = X cheaper in FC terms = inc X, dec M = inc AD -> inc production 2 meet demand = inc eco activity t/f inc DD4L = dec cyclical unemployment

84
Q

How does international competitiveness impact low inflation

A

-> inc international competitiveness = X cheaper in FC terms = inc X, dec M = inc AD -> inc production 2 meet demand = inc eco activity + economy closer 2 productive capacity t/f demand inflationary pressures

85
Q

How does international competitiveness impact living standards

A

-> links 2 availability of jobs / inc unemployment = dec LS, dec unemployment = inc LS

Economics 3,4 (6 decks)

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